Does Tactile Systems Technology (NASDAQ:TCMD) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Tactile Systems Technology, Inc. (NASDAQ:TCMD) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Tactile Systems Technology

What Is Tactile Systems Technology's Debt?

As you can see below, Tactile Systems Technology had US$47.4m of debt at June 2023, down from US$50.3m a year prior. However, its balance sheet shows it holds US$63.2m in cash, so it actually has US$15.8m net cash.

How Healthy Is Tactile Systems Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tactile Systems Technology had liabilities of US$48.5m due within 12 months and liabilities of US$66.4m due beyond that. Offsetting this, it had US$63.2m in cash and US$61.6m in receivables that were due within 12 months. So it can boast US$9.80m more liquid assets than total liabilities.

This surplus suggests that Tactile Systems Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Tactile Systems Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that Tactile Systems Technology improved its EBIT from a last year's loss to a positive US$10m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tactile Systems Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Tactile Systems Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Tactile Systems Technology actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tactile Systems Technology has US$15.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 168% of that EBIT to free cash flow, bringing in US$17m. So is Tactile Systems Technology's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Tactile Systems Technology that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.